Funding your business through angel investors can be a good option. They also bring with them a wealth of experience and knowledge to help your business grow. However, before they part with their cash, they'll want to be sure you're a risk worth taking, so it's crucial to do your research. Lucie Mitchell offers some tips on funding your business with angels.
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1. Is angel investment for you?
An angel investor will take shares in your business in return for providing finance.
Typically they will invest anything between around £5,000 to £150,000, depending on the business, and could be looking for up to a 40% ownership stake in the company. An angel will expect to be involved in most of the decision making, so you need to feel comfortable handing over some of the control of your business.
They will, however, provide you with valuable support, expertise and advice and will be just as motivated as you to see your business succeed, because it will be their money on the line too.
2. Find the right angel
So you've decided to go for angel investment, but where do you find them and how do you ensure they're a good match for your business? There are a number of groups and associations, such as the Angel Investment Network, the UK Business Angels Association and Angels Den, that help to connect entrepreneurs with business angels, but a quick online search will offer a range of options.
Angels tend to either operate individually or as a syndicate.
When it comes to finding the right angel, make sure they know and understand your business and buy into your idea. Research their investment history and background to ensure they have experience in your industry.
The angel will be investing in you, just as much as in your business, so a personality match, as well as trust, is crucial for both of you.
3. Perfect your pitch
A good, clear pitch is key to securing investment from a business angel. When pitching to a potential investor, you don't have long to convince them that your business is worth investing in and that any risk they may be taking is minimal, so you must be able to succinctly pitch your business idea, as well as your vision for the future.
If the angel investor can clearly see the passion and belief you have in both your product and idea, you will stand more chance of getting that all-important funding. Your business plan must also be solid, and include factors such as market research, analysis of competition, and goals and objectives.
4. Know your numbers
An angel investor obviously wants to be certain they will get a good return on investment so it's crucial that you ensure your finances are in order. They will want to know how your business makes money, whether it is scalable, where the sales are coming from and whether there are good profit margins.
You will need to produce management accounts, as well as three year financials, including P&L, balance sheet and cashflow forecast.
5. Prove you're worth investing in
There are a number of things you can do to show potential investors that you and your business are worth the investment. For instance, if you have already invested your own cash into the business, it may demonstrate that you are totally committed to it. Also, define your unique selling points – what problem are you solving in the market?
If you are already selling in the marketplace, what response have you had from customers?
If you've tested the market, what are the results? What reaction have you had from the press or social media? Finally, talk about your management team and how you have the right people in place already to help drive the business forward.
6. Prepare for due diligence
Before you receive any funding, you can expect an angel investor to thoroughly review your business, so it is important you prepare it for due diligence. They will ask many questions to find out what risks are involved, so you need to be ready with some clear and accurate responses, as well as any evidence to back them up.
Typically, an investor will want to focus their due diligence on the management team, as well as the financial, legal and commercial aspects of the business.
7. Have an exit strategy
An angel will want to know, from the start, how they will get a return on their investment, so they will expect to see an exit strategy. Whilst an exit through a sale or merger of the company may be the first option that comes to mind, other strategies could include taking the business to an initial public offering (IPO) or a managed buyout.
Securing investment from a business angel is not easy, but if you do your research, communicate effectively, and make your business as appealing as possible to a potential investor, then you'll be giving yourself the best chance.
About Lucie Mitchell
I'm a contributing editor of BusinessZone.co.uk, published by Sift Media. I worked for Sift for years in a number of roles including editor of HRzone.co.uk and health & education editor of PublicTechnology.net and am now working as a freelance.